Last month it was the Consumer Financial Protection Bureau (CFPB) promulgating its Dodd-Frank Act mandated Qualified Mortgage rule (QM). Dodd-Frank imposed QM to set minimum mortgage standards. Yet it is now being touted as making sure “prime” loans will be made responsibly. True to the government’s long history of promoting excessive leverage, QM sets no minimum down payment, no minimum standard for credit worthiness, and no maximum debt-to-income ratio. The rule provides an eight-year pass for loans approved by a government-sanctioned underwriting system.
Today, Fed Chairman Bernanke dropped the other shoe when he indicated that bank regulatory agencies may make the Dodd-Frank mandated Qualified Residential Mortgage rule (QRM) identical to QM. Loans meeting the QRM standard are exempt from the Dodd-Frank 5% risk retention requirements. Dodd-Frank indicated that QRMs are to have underwriting and product features that historical loan performance data indicate result in a lower risk of default. Somehow the absurdity of having the same rule set a minimum standard for low quality and a minimum standard for high quality simultaneously has been lost on regulators. It was just two years ago that the same regulatory bodies issued a proposed QRM rule calling for 20% down payments and a demonstrated willingness to pay, along with other risk reducing standards.
QM/QRM will codify HUD’s view that the way to distinguish a prime loan from a subprime one is by the interest rate charged, not risk. Ignoring that it was HUD that led the self-described “revolution in affordable lending” that fueled the boom and bust; this distinction is self-serving since the FHA does not price for risk, and the Community Reinvestment Act (CRA), affordable lending mandates, and disparate impact rules effectively require that risk be ignored.
The result is that neither the QM nor the QRM definitions will mention minimum down payment or minimum standard for credit worthiness, two of the traditional three legs indicative of a lower risk loan. Under this bizarre definition, it appears a borrower can have no down payment, a credit score of 580, and a debt ratio over 50% so long as approved by a government-sanctioned underwriting system. Fannie and Freddie made such loans as recently as six years ago.
The Government Mortgage Complex will undoubtedly praise Mr. Bernanke’s sage judgment.
Booms are fueled by excessive leverage. QM/QRM will do little to limit borrower leverage and merely lay the foundation for the next bust.